Why Would One Need a Trust? (with transcript)

Attorney Roy Johnston practices estate planning, real estate law, and business law. He received his Juris Doctorate from Empire College of Law, and his Bachelor of Science in Business Administration from the University of Wyoming. He is an active member of the Probate Section of both the California State Bar and the Sonoma County Bar Association.

Transcript:

Frank Samson: Welcome to Boomers Today. I'm your host, Frank Samson. Of course, each week in our show we bring you important and useful information on issues facing baby boomers, their parents and all their loved ones. We have a great show this week as we do on every show because we have this wonderful guest and we have a special guest today. Somebody I've known for many years and have great respect for, Roy Johnston.

Roy is an attorney, practicing estate planning, real estate law and business law. He received his jurist Doctorate from Empire College of Law and his Bachelor of Science and Business Administration from the University of Wyoming. He's an active member of the probate section of both the California State Bar and the Sonoma County Bar Association.

Roy, it's been awhile since we had you on the show, great to have you back and welcome to Boomers Today.

Roy Johnston: Thank you Frank. It's good to be back and good touch base again with you.

Frank: We're going to talk about a subject matter that many people find complicated and perhaps sensitive, but today we're going to talk a little bit about trusts. I know that's an area of expertise for you, and I thought we could begin our discussion with a little overview of trusts. What is a trust? What does the trust do?

Roy: Trust takes the state out of the probate court and brings it into the office of the attorney when it's being administered. A trust is actually a contract between a couple and it's actually called a trust agreement. They agree on how they're going to distribute their property after they pass away, who their trustee is going to be, etc.

When they pass away and the successor steps into the role of trustee, they must agree by taking the role to carry out the terms of the trust. They do that in the privacy of the attorney's office. If the attorney doesn’t carry out their job properly then it’s considered a breach of the trust.

Frank: Is it strictly used for financial reasons or it could be more than just that?

Roy: It can be for more. Many people don't have any special needs children or other issues with their children or loved ones so the trust is merely a way to distribute assets, paying of final expenses of the settlers of the trust. It's very transaction oriented. There are special types of trusts that address special needs that actually address how the care of a special needs child is going to be done or could talk about later if you have a problem child that needs to have their finances cared for in a special way. Those are special trusts for those purposes.

Frank: Trusts don’t just ensure that someone can be taken care of due to someone's passing. It can also be used to take care of someone while their benefactor is still alive?

Roy: Exactly. The trustee takes over the management of their finances when a person is declared incapacitated. When the settler passes away, the trustee then pays the final expenses and distributes the property. When there's a special needs child, a trust continues for that child that has ongoing obligations to protect the child, to care for them, to keep them qualified for government benefits and so forth.

Frank: Let's say they don't have a child that has any special needs. Why would someone need to put a trust together and when would be the best time to do that?

Roy: Sure. There's four advantages of a trust over just a will or no will at all. First, I've already mentioned that it keeps it out of the court, which is significant for two reasons. When things go into court with a will or no will at all, it's a public proceeding. Now, for many of us, we don't care if our financial affairs are open to the public. But for some people that may have a divorce where they have a former spouse or they have creditors that are concerned about, they don't want their financial affairs and their assets and liabilities are open for viewing with the public.

Another problem with the will is that it takes incredibly long time to go through the probate court. Especially here in California it takes up to 18 months to get a complete process done with a probate, whether there's a will or no will, just because you have to go back to court and ask permission to sell a house or to complete a transaction, something like that. Here in California, it takes about six weeks to get a court hearing date. Things moved ponderously slow.

Then finally, it's so much more expensive to administer a will or no will at all because the probate fees are significantly higher. Those are statutory fees approved by the court and they're much higher than trust administration expenses that are done in the lawyer's office.

Frank: If somebody didn't have a trust, but let's say they had a life insurance policy with a beneficiary on it. When the person passes, does the policy go to probate?

Roy: No, it won't. It won't go to probate, nor will any bank accounts or investment accounts that have beneficiary designations. Those will go directly to the beneficiaries. That actually raises an interesting point because many people have very expensive homes, especially here in California, but their bank accounts or investment accounts may be very modest or they may have had significant illnesses at the end of their life and they've spent down much of their life savings.

If there's a payable on death clauses on the life insurance policies, then that money is going to go directly to the beneficiaries. It doesn't come into the trust and therefore the trustee has no liquid assets with which to administer the trust.

Frank: Got it. Now, I do want to get involved and ask you about special trusts. To give you context, I often see that in case of somebody who has been diagnosed with some form of dementia like Alzheimer's or Parkinson's, or a disease that is sadly not reversible, their family is trying to protect the assets because as you know in most cases it's private pay to pay for this kind of care. Quite often I've worked with have created revocable trusts to help with this unique situation, and I was just wondering if you could explain how that works a little bit better.

Roy: Sure. About three years ago there was a ruling that said that there will not be a Medi-Cal claim assessed against trusts whether revocable are irrevocable. There will only be a claim for reimbursement against a probate estates.

That makes it even more important for there to be a revocable trust. There still is value for an irrevocable trust for some federal benefits. In the case of disability for example, it's important to have an irrevocable trust if you're claiming those benefits because the federal government does not recognize the protection of a revocable trust like California does.

Frank: Got It. Let's say somebody was trying to protect their assets and they're going to be getting on Medicaid or Medi-Cal, or maybe they're a veteran and they want to receive the benefits coming to them from the VA. What type of trust in those situations would you usually recommend?

Roy: That's a little difficult to generalize. The best I could say is that's a great conversation to have with the estate planning attorney in order to anticipate what benefits you may be applying for.

Frank: That’s great advice. Now, what are some of the other types of special trusts that you were mentioning to me earlier?

Roy: Sure, absolutely. Over the years I have developed a special sub trusts that address specific needs and I've given them kind of a pet name to make a little bit light. But the subject matters are actually very serious. I heard you mention, "Mommy trust," that is one of the trusts.

Basically, if something should happen to one parent, and the other loses their source of income, then we create this trust in order to provide for them and meet their needs for the rest of their life. We estimate this using actuarial tables and estimates, and then we allocate a lump sum into that trust for the parent, to be used to care for the parent until they die. Then when that happens, any funds that are leftover then go to the children. That way they can provide and carry out their obligation to a parent if something happens to them. That’s what the mommy or daddy trust does.

Here in California, and I'm sure in most states there's now a pet trusts. Now you can actually allocate a sum of money to a trust for a pet, and appoint a guardian to care for the pets and have a trustee who manages the funds for that pet.

Frank: I think that's great. Pets are very important to people.

Roy: It is. They are. Another option besides the pet trust is, it’s often put in the estate plans that whoever takes the pet receives a gift of a certain amount with the request that it be used for their care, especially toward the end of their life.

If no pet can be or no owner or it can be found for the pet, if the pet has to be donated to a shelter, it's specified that it goes to a shelter with a no kill policy along with that gift as a thank you for taking care of the pet for the rest of their life. That's an alternative to the puppy trust that we discuss.

Frank: There is a couple of other you mentioned to me, one of them I'm almost afraid to ask about it. One you have is called a druggie trust. What's that?

Roy: Yes. Unfortunately in today's world we do have some children or loved ones who are addicted and have some type of substance abuse no matter what it is. The parent feels a strong obligation to keep them off the streets and keep them in a minimal housing situation with plenty of food, they want medical care and if they are going to go to education, they want their education paid for if they're straightening out their lives.

But what they don't want is to give a bunch of money each month for them to actually use for their drugs or drinking or whatever the substance abuse is. We put in place... it's a very detailed druggy trust that says that, "The trustee will pay directly for their apartment or condo or they'll pay directly their car payment. They'll pay directly as many expenses as they can so they keep the money out of the hands of the child and give them an allowance that is designed to give them enough for food and a little bit of spending money."

But it doesn't give him a substantial amount of money. If they want more than that, then they have to submit to random drug testing throughout the month at the option of the trustee and within 24 or 48 hours of actually receiving a distribution. They have to test drug free at a facility that's selected by the trustee.

It can be geared down very tightly so that they're being taken care of and their education, their medical expenses, their housing, their transportation and food allowance is taken care of, so forth, even a spending allowance. But to get more than that, they need to show that they're taking steps for recovery.

Frank: That is a nice segue into my next question, which is, what advice do you give to families on the selection of a trustee? What should be looked at? Should it be a family member or a non family member? What are your thoughts as far as how families selects the trustee?

Roy: That's a great topic and we could spend at least two or three podcasts on that subject alone. But in general, a family member, or one of the children is perfectly fine to be a trustee. I don't recommend co-trustees by the way for multiple reasons, but a child could be a trustee. In many cases, especially in blended families or where there is a difficult child, like a child that has substance abuse or a special needs child, it's better to have a professional trustee.

In most states, at least here in California, there’s this thing called a private fiduciary, which is a licensed and bonded individual with the State of California that is empowered to deal with difficult situations and to resolve conflicts without picking favorites.

Frank: Got It. Is that in your experience usually the way people go or do they usually have a family member as a trustee?

Roy: It depends on the family dynamics. I think probably about half of my clients are fine with a child being the trustee and most of the time they get along fine with their siblings and so it works out just fine. But in a good number of my cases maybe up to half they say, "We either have a blended family with kids from multiple marriages or our kids are scattered all the way around the world in some cases or they're so busy they don't have time to take on something like this." In this case a private fiduciary could be the best choice.

Frank: Got it. Good. I want to bring up another subject matter that I think is so important for people to understand, which is the power of the attorney. In my opinion, everyone over the age of 18 should have a power of attorney.

The reason I say it's not the best name in the world is because when people hear it, they think, "Oh my God, this is going to be costly." Why don't you explain what a power of attorney does, and why is it so important for everybody to have one?

Roy: There are two different types, but to explain the word attorney, the type of attorney that they're talking about in those documents is what's called an attorney in fact. An attorney in fact is somebody that you designated as an agent and to make decisions for you if you're not able to make them. There's the two different types. One is in the medical care decisions for you and the other is for any financial decisions that need to be made for you. Two different documents, two different purposes.

But if you read those carefully, you'll see that anyone over the age of 18 can act as an attorney in fact. I'm an attorney at law, which is distinguished from an attorney in fact. You don't need a lawyer to be an attorney in fact, and you can appoint loved ones or trusted ones to be your attorney in fact.

Frank: Tell us, why would you suggest that someone even relatively young and in good health should set up a power of attorney and what's involved in doing it?

Roy: You bet. First of all, they're very simple devices. If you are doing powers of attorney, you can download forms or pre forms off the Internet and are relatively inexpensive. If someone walks in off the street and wants a power of attorney for me, it's a very inexpensive cost to have that done.

But here's what happens. Let me tell you a story. There was this elderly couple that have been married for many years and had nothing, no healthcare directive, no power of attorney for property management. The wife developed dementia and they went to sell their home, but because there was no power of attorney for property management granting her husband the power to sign for her, they were unable to sell their home.

We had to actually initiate a conservatorship proceeding to have the husband declared as the conservator of her estate so that he could sign the papers to sell their home and to put her in a dementia care facility. That cost about $13,000 to do. They could have done a simple power of attorney for property management, free off the Internet. Most attorneys charge less than a couple of hundred dollars to do that if they would like it custom done.

It was a tremendous cost and it took about 16 months to complete and the house couldn't be sold until that was completed.

Frank: That’s interesting, so people that think that if they're married, the spouse must be able to be able to make those decisions. That's not the case.

Roy: That's not the case, especially for legal documents, like titles on houses and so forth. The spouse is usually able to make healthcare decisions on behalf of their spouse without needing a power of attorney. But if one spouse is injured together or incapacitated together or one dies, the children have to have a power of attorney. A power of attorney for healthcare or a healthcare directive is absolutely necessary.

Frank: All right. Roy I could talk to you all day, you're a wealth of information but we're out of time. I want to make sure that you share with our listeners if they want to learn more from you and your firm, how would they reach you? What would be the best way to reach you?

Roy: They can reach me through the Internet and our website at www.johnstonthomas.com, they could email me at rjohnston@johnstonthomas.com or give me a call at 707-545-6542.

Frank: Roy thank you so much for joining us on Boomers Today. It's great having you back.

Roy: It was great fun. Thanks for inviting me.

Frank: And everybody I want to thank you for joining us on Boomers Today. Be safe out there and we'll talk to you all soon.